The profile of a lender group can range from project to project, and may include a combination of private sector commercial lenders together with export credit agencies, and bilateral and multilateral finance organizations. These international, often political, entities are frequently involved in PPP projects and can have an important impact on the risk allocation and financing used in a project. When involved in such projects, these agencies will place strict requirements on the project structure and lending arrangements, in particular in relation to environmental and social safeguards). Lenders anxious to benefit from such involvement (and the potential mitigation of political risk) will make it a priority to ensure that these requirements are satisfied.
Funding is sometimes provided by project bonds, sold on the capital markets, or by sovereign wealth funds and other financial intermediaries. As a general premise, the lenders will only want to take those risks which are measurable and measured. The lenders will not be in the operation, construction or insurance business and therefore will not want to bear risks with which they are unfamiliar and which are more appropriately borne by other parties. Nevertheless, the lenders will be involved in most of the important phases of the works, including the financial structuring, the drafting of the project documents and certification of completion. They will generally maintain their review powers over the project with the assistance of an independent engineer (a specialist technical adviser who monitors construction and approves completion of milestones, amongst other things). The lenders may require that direct agreements be entered into between themselves and each of the project participants.12
The terms and conditions that lenders will be willing to give for a specific project will depend primarily on the nature of the borrower, in particular the borrowers credit position and the nature of any other security, credit enhancement or support the project may have. However, the nature of the lender will have a lot to do with the terms and conditions offered. For example,
• The conditionalities applied to any loan will depend very much on the goals of the lender. Commercial lenders will apply conditionality focused on improving revenues, managing costs and protecting the lender's cushion. Lenders whose focus is national interests, for example encouraging exports such as export credit agencies, will focus more on the nationality of contractors and suppliers and their interests. Finally, lenders whose reason for being is tied to development will be concerned more with sector reform, economic growth and poverty reduction.
• Bankability requirements and lender appetite will depend on the nature of the lender, their existing loan portfolio, their strategy for portfolio development and their desire to enter into new markets. Lenders will react to political risk in different ways, those familiar with the country or a region may approach the risk in a less risk-averse manner than others. Lenders with a bilateral or multilateral origin may have better relationships with the relevant government, and will therefore view political risk in a different way.
• Price and fees will clear he clearly very based on market practice and on the nature of the lender in question. Similarly, some lenders will be more efficient than others, and therefore the cost to the borrower of managing lender involvement and due diligence can differ significantly. For example, some lenders will accept common lender technical and legal advisors, while others will insist on having their own lawyers and technical team.
• The flexibility exhibited by different lenders can vary, for example the ability of the borrower to renegotiate or reschedule debts terms and conditions. To this extent, banks are usually more flexible than bondholders.
• The complexity, sophistication of the type of debt available to borrowers will depend on the nature of the lender, their experience in such products and the depth of financial market in which the lender operates (see section 4.4 for further discussion of this issue).
Lenders will often not act alone, and the grouping of lenders, the relative weight of each lender's involvement and the role such lenders play will have a significant influence on the nature of the debt available. For example, some lenders act as arrangers, providing the service to the borrower of interfacing with different lenders and helping to coordinate access to debt. This may involve underwriting, according to which the lender promises to provide access to all of the debt needed. Lenders may choose to club together, whereby they will agree amongst a small group of lenders to each take a certain proportion of the project requirements. Once a lender has agreed to provide debt, it may choose to syndicate some or all of its position, by selling its debt onto the financial market to other lenders. Where multiple lenders are involved in a project, they will agree together on a common lender position on certain issues, for example management of security rights, which is usually formalized in an intercreditor agreement.
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12 For further discussion, see chapter 29 of Scriven, Pritchard and Delmon (eds), A Contractual Guide to Major Construction Projects (1999).